The Hermès paradigm (as we saw it)Over time, Hermès has built a most enviable position in the luxury goods industry (The Epitome of Modern Luxury). This - in our view - was built on four pillars: 1) frustrating demand for its iconic leather models; 2) using adjacent product categories to provide accessible entry price points (Entry Price Points and the real Nature of Luxury Goods), while keeping the core leather products expensive and out of reach (Category Segregation); 3) sticking to organic growth and avoiding acquisitions; and 4) maximising retail space productivity and ROIC.

Hermès is changing ...Hermès seems to be moving away from its tried-and-tested formula of frustrating demand for its iconic products. It has, in fact, increased leather goods manufacturing capacity over the past few years. The principle of 'category segregation' also seems to have been discarded, as consumers can buy Hermès handbags at significantly lower prices and just north of EUR1,000. These are not Birkin or Kelly, obviously, but they are still Hermès handbags: Evelyne, Garden Party, Picotin, etc.

... and morphing into a Mega-BrandWe think that 'demand frustration' and 'category segregation' were the two traits that set Hermès apart from mega-brand peers. With these gone, the 'genetic difference' between Hermès and - say - Louis Vuitton is more difficult to identify. Hermès is still more desirable in the eyes of some consumer nationalities (Measuring Brand Exclusivity and Desirability - China), but this seems more a difference in 'intensity' than in 'nature' as other consumers seem to have the opposite perception (Measuring Brand Exclusivity and Desirability - France).

Chinese shoppers are no longer blinded by bling, visitors can get better deals elsewhere

The latest dent in Hong Kong’s flailing retail market came with U.S. clothing brand Abercrombie & Fitch calling time on its flagship store two years before the end of its lease.

The city, which has witnessed a consistent luxury slump since 2013, saw many major brands such as Ralph Lauren, Forever 21, Prada and Paul Smith pull out flagships earlier this year. Italian luxury clothing and accessories label Tonio Lamborghini also shut more than 10 of its stores and in-store counters in the city. Official Hong Kong government data shows a consistent decline in retail sales since 2013 through 2016, when sales reached their lowest point. While Abercrombie & Fitch, which is battling with its own financial instability, blames exorbitant rents (HK$7 million ($0.9 million in monthly rent) as the prime reason, for other brands the picture is less clear.

With the amount of Mainland Chinese shoppers the city was host to, Hong Kong was once hailed as the ‘Great Mall of China.’ However, Chinese shopping tourism hit a major lull post the anti-corruption crackdown initiated by President Xi Jinping in 2012. The initiative, intended to eliminate corruption of high profile Chinese government officials had the biggest negative impact on the retail market, particularly in luxury. The high exchange value of the Hong Kong dollar further contributed to the weakening of the city’s position as a retail destination, as the territory price advantage gradually diminished for Chinese tourists.

“Shopping in Hong Kong is no longer a bargain for Chinese tourists. The traveling Chinese consumer is now opting for alternative destinations like South Korea, Japan, or Greece. These are places with a little bit more character, a distinct point of view, or places that offer experiences beyond shopping,” Saisangeeth Daswani, Advisory Strategist at innovation and trend research corporation, Stylus, told Observer.com.

The evolving tastes and aesthetic of the Chinese consumer seem to be another important factor responsible for the retail shift. While Hong Kong offers some of the best-known designer stores in the world, it fails to attract the increasingly sophisticated and well-informed shoppers from abroad. Both domestic and foreign consumers in the city have become smarter about where to find products for the lowest prices and demand more in return for their money.

“What’s key for luxury brands in Hong Kong is to consider the consumer’s changing mindset and offer more immersive, unconventional and discovery-based experiences,” said Daswani. “The luxury brands have been too focused on products, prices and sales. Consumers want more from their purchases than simply getting their hands on the latest accessory, they want an experience, a story to tell.” Studies indicate that Chinese consumers now look to distinguish their choices from the most obvious mainstream brands and regular edition products. Flashy logos and shiny watches just don’t hold as much appeal as they did anymore.

“The Asian consumer’s style sense is evolving, and their fashion purchasing behavior is becoming more European. The appeal of the preppy look is diminishing and people don’t see the need to buy luxury when attractive premium brands offer similar looks,” agreed Jaana Jätyri, CEO at trend forecasting agency, Trendstop.

Since most of the luxury category brands are only accessible to the Chinese shopper who is able to travel beyond China, many have opted to simply shop online, much like the American consumer.

Prada, which also closed much of its primary stores in the city, indicated the brand will now cater to the Chinese market through e-commerce. “The Hong Kong closure is part of a worldwide, strategic realignment of brand retail channels. Over the next two years, Prada will strengthen its own e-commerce platform, giving priority to China, Hong Kong and Singapore with the objective of achieving global reach,” an official spokesperson for the company told the Observer.

While this could eventually strengthen a new shopping model for the country, unfortunately it means more woes for Hong Kong’s traditional retail market. However, Daswani believes all hope is not lost. As retail rents in Hong Kong continue to fall as a result of high end departures, mid-market, ‘contemporary fashion’ and affordable luxury brands are jumping in. Moreover, analysts predict that if the exchange values of the HK dollar stabilize in 2017 leading into increased consumer confidence, retail sales may slowly recover during 2018 in Hong Kong, albeit in a different kind of retail store.

Whether the city will regain its status as a hot shopping heaven, only time will tell. As of now, an overall uncertainty clouds the Hong Kong luxury market, and it’s up to the retailers to adapt to the new consumer interests and adjust to this broadening notion of luxury. Elsewhere, shoppers are experiencing a rise in customization offers, one offs, local exclusive pieces, limited editions and in-store exclusive events, Hong Kong retailers may need to catch up.

Last year was a bad one for many companies selling expensive fashion, handbags, and jewelry. For the first time since the financial crisis of 2008, the global market for personal luxury goods failed to grow, stalling at €249 billion (about $258 billion).

The good news is that 2017 should see a return to growth, according to a Dec. 28 report on the global luxury market by management consulting firm Bain & Company, only it won’t look anything like the boom years from 2010 to 2015, when global sales of such goods jumped 45%, fueled by Chinese consumers with high-end appetites. The slowing of China’s economy and its government’s ongoing crackdown on corruption, paired with turmoil in the US and Europe from Brexit, terrorism, and the US presidential election, have created a “new normal” of low single-digit growth and intense competition. The years ahead will produce “clear winners and losers,” Bain says, determined by which brands can read the field and respond best.

China is at the center of this shift. Today Chinese shoppers account for 30% of all sales of personal luxury goods. While Bain foresees the Chinese market improving again after contracting slightly in 2016, it isn’t likely to return to its former rate of expansion, which insulated brands’ bottom lines from other problems. “We expect around 30 million new customers in the next five years coming from the Chinese middle class,” Claudia D’Arpizio, a Bain partner and lead luxury analyst, told Quartz in an interview last year. “But this is nothing comparable to the past big waves of demographics entering [the market]. This new normality will mean mainly trying to grow organically in the same consumer base, being more innovative with product, more innovative with communication.”

Exane BNP Paribas echoed the thought in a December research note to clients. “The peak of the largest nationality wave ever to benefit luxury goods is behind us,” the authors wrote. “Brands need a new paradigm, other than opening more stores in China and bumping up prices.”

The period luxury is entering could see some of its slowest growth since it started opening up to a mass audience around 1994. That was the year, D’Arpizio noted, that “the jeweler of kings and queens,” Cartier, launched its first lower-priced line for mainstream consumers. Other brands followed in search of greater sales, and names “like Gucci, Prada, also Bulgari were really growing, doubling size every year, sometimes triple-digit growth rates, opening up to 60 stores every year and covering all the capitals across the globe,” she said.

Around 2001 came another period of expansion when brands became global retailers, not just selling wholesale, amid a spate of acquisitions that would eventually create today’s giant luxury conglomerates, including LVMH and Kering (previously Gucci Group). By the time of the financial crisis, luxury had conquered much of the US, Europe, and Japan, and then China came along to offer more unfettered growth.

There’s no new China, however, at least not now. The next big luxury market is likely Africa, particularly countries such as Congo, Angola, and South Africa. But D’Arpizio estimated this scenario won’t come about for seven to 10 years, meaning only moderate expansion for some time.

“In the new normal, we expect a compound annual growth rate (CAGR) of 3% to 4% for the luxury goods market through 2020, to approximately €280 billion,” Bain’s report says. “That is significantly slower than the rapid expansion from the mid-1990s to the late 2000s.”

Other characteristics of this new period include more shoppers making purchases at home. Last year, local purchases exceeded tourist purchases by five percentage points, the first time since 2001 that has happened.

And digital sales will keep growing. Last year they accounted for 8% of the industry.

British fashion label Burberry came in behind Chanel [2016 LUXURY MARKETER OF THE YEAR], placing as second runner's-up for its first-mover status.

Burberry added fuel to the conversation surrounding the see-now, buy-now movement, announcing early in the year that it would be changing its runway show schedule. This move consolidated its presentations to two a year, showing men's and women's collections together (Burberry updates fashion calendar to meet global demand).

Burberry was became the first fashion label to create an Apple TV app, becoming the first brand to broadcast a fashion show on the platform (Burberry launches on Apple TV with menswear show live-stream. When launching the fragrance My Burberry Black, Burberry took advantage of a bevy of newer social media tools, such as Instagram Stories and a Snapchat filter, to create a mood around the scent.

While unseated by Gucci in this year's L2 rankings, Burberry was positioned in second place, also showing Genius-level sill in digital.

First runner’s-up Chanel has made itself more relatable to consumers without sacrificing its prestige.

The brand made moves to appeal to a younger audience, casting teens Lily-Rose Depp and Willow Smith in separate ad campaigns.

With a continued focus on video content, Chanel introduced five new films in its “Inside Chanel” series. The brand also launched a new series of unscripted Beauty Talks, inviting personalities such as Gisele Bündchen and Keira Knightley to talk makeup and skincare with its global creative makeup and color designer Lucia Pica.

Italian fashion label Gucci is Luxury Daily’s 2016 Luxury Marketer of the Year for its revamped advertising image under the creative direction of Alessandro Michele.

Gucci won over first runner’s-up Chanel and second runner’s-up Burberry. All three brands were able to adapt and connect with a new generation of consumers while not losing focus on their luxury positioning.

The Luxury Marketer of the Year award was decided based on luxury marketing efforts with impeccable strategy, tactics, creative, executive and results. All candidates selected by the Luxury Daily editorial team and from reader nominations had to have appeared in Luxury Daily coverage this year. Judging was based purely on merit.

Gucci made over

2016 marked the first full year with Mr. Michele at the head of Kering-owned Gucci. Aside shifting the brand’s apparel and accessories design, he has made his mark on the brand’s marketing, replacing an overt sex appeal with a more romantic femininity.

Playing off motifs created by Mr. Michele, Gucci unveiled a series of artistic initiatives that deconstructed these themes. Its customizable Ace Sneaker was the subject of creative short films, while its codes became the basis for a multiplatform project that spanned a physical space in Tokyo and online mediums (Gucci makes room for reinterpreting brand codes).

Allowing consumers to put their own spin on these new icons of the brand, Gucci also launched customization programs for select products.

Millennials, the much-studied generation whose behavior has seduced and puzzled luxury brands in equal measure, are no longer the sole focus for companies hoping to attract new customers: Generation Z, the label given to those born since 1995, is the latest target audience, thanks to their future purchasing power and the influence they hold over the spending of their parents and grandparents.

Unlike their older peers, who have watched technology gradually embed itself in their daily lives, members of Generation Z are known as “digital natives”: those who cannot remember what it is like to not have a cellphone permanently attached to their hand.

“This is an impulsive group who will turn adverts off, call BS really easily and hate being talked down to,” said Meridith Valiando Rojas, co-founder and chief executive of DigiTour Media, a Los Angeles-based group that has led the way in a booming events trend in live entertainment. “They know there is always something else out there as they have always had that information at their fingertips. That is hard for many brands to contend with.”

DigiTour Media hosts festivals where social media stars step out from behind their bedroom webcams and meet their teenage fan base. The festivals showcase people who have created mass followings on YouTube, Instagram and Music.ly, the lip-syncing app with over 100 million monthly users and that anyone over 21 is unlikely to have heard of. DigiTour Media group now puts on approximately 200 events a year, comprising both DigiFests (one- or two-day showcases) or DigiTours (groups of performers who rove the United States). The combined reach of the acts is 350 million people.

“It is all about bringing the internet to life — their internet to life,” said Ms. Valiando Rojas at The New York Times’s Global Leaders’ Collective conference, held in Washington this past week. A former music executive, she recognized in 2010 that there was no equivalent of a music festival on the market for younger teenagers. She also saw that when it came to hormone-fueled popularity, 21st-century social media stars had as much clout as the biggest boy bands.

“Generation Z are the most influential group of consumers right now. Whether or not they are buying luxury today, they will be tomorrow,” Ms. Valiando Rojas said. “So understanding where they think, where they go and how to advertise to them without rubbing them up the wrong way is crucial.”

That more and more people are looking for experience-led luxury purchases over products is another factor in why brands should be looking to build relationships with this demographic, both on and off their phones.

There is a distinction between Generation Z and millennials in how they behave within their social media communities. Millennials are keen to be unique, but members of Generation Z want to be popular and part of a group. Having grown up immersed in social media, members of Generation Z define their identity by how many “Likes’’ they get on Facebook or how many followers they have. They see their online personalities as extensions of themselves

“That is why these influencers are so important: Teenagers today trust these voices,” Ms. Valiando Rojas said, adding that she booked acts based on their popularity and what the followers of her company’s social media accounts suggested. She pointed to Baby Ariel (age 16), Jacob Sartorius (age 14) and the Dolan Twins (age 16) as some of the biggest names to watch.